Does Market Size Really Matter?

Does Market Size Really Matter?Communications industry consolidation has its plusses and minuses.

Communications industry consolidation has its plusses and minuses.

Although new players regularly enter the industry, it's natural that most of the attention goes to the larger firms with established market presence. When a well-known vendor buys or merges with another large well-known firm, the immediate concerns include the impact on the consumers' choices. Mergers and acquisitions such as the Mitel buyout of ShoreTel lessens the options for those businesses that are the ideal buyers of premises-based systems targeted for a sophisticated SMB environment. Sure, there are alternatives from smaller firms and cloud vendors, but for some with specific needs, the competition is getting thin.

But are fewer choices bad if the remaining choices are strong options? That can depend upon the variety of the alternatives, especially when it comes to policies and pricing.

A Sprint/T-Mobile merger, although not officially announced yet, is one of those producing a wide range of analysis. Both carriers (third and fourth in market share) are concerned about having the market size, resources, and financial strength to flourish against competitors Verizon and AT&T. However, wireless consumers have benefited from two carriers looking to draw customers away from the leaders. Both Sprint and T-Mobile have been creative in pricing, packaging, and marketing services that stand out from the leaders as well as each other. Will that continue post-merger? It's possible that the combined carrier settles in as a near-equal of the other two and we see more of an oligopoly (where through parallel actions, the few controlling vendors can greatly influence price and services).

Many analysts agreed that the non-merger that was explored by these two firms back in 2014 was unlikely to get regulatory approval, just as the AT&T buyout of T-Mobile proposed in 2011 was denied. The political and regulatory landscape have changed in the meantime -- it will be interesting to see how the arguments and concerns are received this time around.

The comparisons to Canada's cellular market are interesting as well -- the country only has three major carriers (Bell, Telus, and Rogers) and their plans are priced basically the same, likely due to the reduced level of competition. The parallel would be no low-cost carrier in the U.S. putting pressure on the market leaders.

Similarly, the (not yet approved but getting close) acquisition of Level 3 by CenturyLink will reduce the WAN carrier choices. In some markets, our clients specifically chose Level 3 either because it was not the incumbent LEC with strict policies (or tariffs) that limited choices or because of price advantages. If those differences disappear post-merger, then it hurts the buyers who then have limited alternatives. However, one key argument in favor of the merger is that additional competitive choices exist via cable companies and wireless providers.

It is not like this is the only M&A action in the industry. According to Statista.com, there was $410 billion worth of M&A activity in the technology sector collectively in 2016. We saw Zayo buy out Electric Lightwave and Verizon absorb XO Communications, both announced in 2016 and closed earlier this year. Does the Department of Justice and the FCC block only the largest deals or those truly shown to be detrimental? Or will the "hands-off" approach of a business-friendly government believing the marketplace will figure it all out without oversight let almost anything go through? It seems likely that CenturyLink will get approval to proceed.

Consolidation in the cloud telecom market has been predicted and observed for the past couple of years. Even those vendors not part of a merger are constantly evaluating their financial situation. Market leaders such as West Communications and 8x8 were looking for buyers (the former was purchased by Apollo, the latter is still looking) and BroadSoft is in discussions with LBO firm Searchlight Capital and possibly Siris Capital as well. The business plan for many cloud vendors seems to be "make some noise, gain a bit of market share, and sell out to someone with deeper pockets." It sometimes works; for example, Vonage has gobbled up several smaller players that fit this model.

Consolidation is not always a bad thing, of course. While some will bemoan the reduced number of choices, this only matters if the choices are quality providers with the ability to perform. Strong market leaders can bring stability and provide a baseline for the newer and smaller vendors to distinguish themselves by comparison. A smaller vendor can offer lower prices, better services, more innovation, or higher quality, but the buyer can make the determination by using the market leaders as the evaluation reference point. Many buyers will opt for the "safe" choice represented by those at the top of the marketplace. But the safe choice can still be disappointing if performance is under expectations. And a large firm cannot control every aspect of its delivery, especially in the technology industry.

Take a large professional services group, for example. Within a large consulting firm or those providing design and implementation services for a vendor, by definition, some number of the individuals will be top quality and some will be average employees. In really large firms, it is even likely that some staff shouldn't be retained. But in the meantime, they are representing the company and handling projects with less skill and perhaps with diminished results. Our clients have sometimes suffered from the underwhelming performance of a vendor's B-team, but not every project run by a large vendor can be worked on by the A-team. Conversely, a small firm has the opportunity to be more selective and potentially employ only top-quality individuals as a way to provide differentiation. In fact, for survival, a smaller firm must consistently do a better job and provide extra value.

Thus, it is safe to say that every industry benefits from a mix of small firms carving out unique value propositions and industry leaders. Too few market behemoths that dominate the industry robs the buyers of quality choices; it also removes a key incentive for the largest firms to improve and reliably perform for a fair price.

"SCTC Perspectives" is written by members of the Society of Communications Technology Consultants, an international organization of independent information and communications technology professionals serving clients in all business sectors and government worldwide.

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